10 March 2022
A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
Keeping Up With The Joneses
Welcome to this week’s blog. If you’d prefer to listen to an audio version, click here for the podcast.
For the past 10 years, the housing crisis has taken top billing in most external commentaries on the real estate industry. Particularly the inability of an increasing proportion of young (and older) people to get on the housing ladder, combined with associated mountains of debt stretching out to retirement, have left many in the UK feeling disenfranchised. In that context, it was perhaps unsurprising to see the criticism that TV presenter Kirstie Allsopp received when she recently suggested that housing unaffordability stems from the lack of willingness from a younger generation to forego luxuries like a Netflix subscription. Is this a case of a tone-deaf statement from an ‘out of touch rich, b***h’ (her words), or is there some truth surrounding the poor choices of the avo-on-toast munching generation? In today’s edition of Futures /Cut I ask whether life is getting better or worse for young people, and unpack the impact of a new breed of competitiveness on quality of life. As ever, I’ll conclude with the takeaways for cities and real estate.
Firstly, let’s consider the economic backdrop. In 1980, GDP per capita was ~£16,000. Now, a generation later it’s £33,000. Fantastic! There is no doubt that this rise in average income has delivered a myriad of benefits to Gen Z that was not afforded to their grandparents. It has allowed us to fund a reduction in poverty, an increase in life expectancy, an increase in safety in the workplace, an increase in eating out, household conveniences like the microwave, an expanded welfare state, 100 channels on TV instead of 2, and the availability of ‘better stuff’ through technological progress. In this last case just consider the features of a cell phone that a teenager can now afford, vs the functionality of one that few senior execs could afford in the 1980s. If we equate GDP per capita with standard of living (many do), then does this mean that our standard of living has doubled? Well, no, not quite. We need to modify the headline figure to take account of inflation and fluctuations in purchasing power parity (the relative ability to purchase a basket of goods between countries) as well as other factors such as taxation. This certainly tempers the gain; but the fact remains that people today are materially ‘better off’ than their grandparents. However, before you tell one of your junior colleagues to go cry into their skinny chai latte; I’ll offer a few counter-perspectives.
What changes have we seen in recent history? Whilst over a longer horizon we have indeed seen economic gains, in real dollar adjusted amounts UK GDP per capita is less now than it was in 2007. The financial crisis, a devaluation of UK currency relative to the dollar, Brexit and slowing productivity have put the brakes on growth. Meanwhile, for Joe Average Jnr, the cost of housing has been subject to significant inflation. The cost of money fell dramatically as easy monetary policy was ushered in to bail out the financial crisis, and coupled with undersupply, house prices have exploded. In fact, in the period since GFC (2009), house prices in the UK have almost doubled. Of course, the pro rata cost of servicing the mortgage has gone down, but actually getting on the ladder is now much harder, including saving for the deposit and procuring the volume of debt needed to make a purchase. Land and housing costs are economic residuals, which tend to eat up a disproportionate share of economic progress, particularly for those least able to fund them. The upshot is that people are renting for longer (and paying more to do so), with home ownership appearing an increasingly unattainable prospect for many.
Can this be addressed through cutting back on Netflix? Let’s consider some facts. The average house price in the UK is ~£200k (more like £500k in London). The average first-time-buyer’s house deposit is ~£50k, and typical repayments (in this low interest environment) are £750 pcm. Meanwhile the average net income is ~£1,750 pcm (with younger people typically of course earning much less). More than 20% of people in the UK now spend the majority of their net income on housing costs. Meanwhile the cost of a basic Netflix subscription is £5.99 pcm (or ~£0.15 per hour based on typical usage). Hence, if you are entirely reliant on using the savings from cancelling your Netflix subscription to fund your house deposit, you are looking at 694 years to achieve your goal. Now I know that this is a crude take; however, the relativity between the cost of what is a small luxury and on the other hand a major life expense is I believe clear. In that context it feels churlish and disproportionate to one’s happiness, to expect people to forego this modest cost.
And this is where it gets interesting. Whilst we are now undoubtedly better off, there is persuasive evidence that being better off does not necessarily make us happier. Whilst GDP is recognised as being in the basket of drivers of happiness; it is broadly acknowledged that income growth, personal progress and income inequality (all relative assessments) are equal or bigger influences. Countries which are both rich and equal (notably the Scandinavians) tend to be the happiest. However, poor yet equal countries which are riding an upward trajectory, such as Costa Rica, tend to outperform their rich but unequal and low growth counterparts. In this context, the UK has both a very high level of income inequality and a relatively flat growth profile. The richest fifth in the UK have an income 12x higher than the poorest fifth, and wealth is even more starkly divided than income. This is a function of a highly competitive and mature capitalist society, with significant barriers to social mobility.
It is in our nature as humans to want to do better than other people, and to be able to prove that we have done so. This is why relative and conspicuous success (e.g. having more of life’s luxuries / showing the world that you’re happy) appears to have become more influential on modern society than actual success (e.g. home ownership / money in the bank / being happy). Furthermore, in the past decade the rules have changed significantly for what it means to ‘keep up with the Joneses’ and in my assessment, this change underpins a series of attitudinal differences compared with a previous generation.
The phrase ‘keeping up with the Joneses’ was coined in a cartoon strip in the early 20th century to define competitive one-upmanship with one’s neighbours. The phrase gained momentum in the second half of the century with the rise of materialism, mass production, and a growth of middle-class consumerism. This moved society from one which applauded things like class, moral virtue and inherited status, to one in which the focus skewed towards material wealth and consumption. There are however three things which have amplified this change in the 21st century.
Firstly, the Joneses are now sourced from a much bigger pool. In the nineteenth century, the Joneses were literally your neighbours, and people largely judged themselves relative to the success of others in their local community. Moving to the 20th century, the Joneses become fictional families on TV adverts designed to create jealousy in order to drive sales. In the 21st century, powered by the radical openness of social media, the Joneses are literally everyone – your phone now contains a whole world of people against which to compare yourself. There are of course a couple of issues with this. Firstly, the visage of people on social media is typically a highly curated one that shows off the best elements of their life. And secondly, in a much bigger normal distribution of people, the Joneses are more likely to be positive outliers (e.g. world beating athletes or celebrities); and hence you are much less likely to be able to compete successfully with them, than you would with your neighbour.
Secondly, the Joneses now include your parents. Whilst, as discussed above, objectively and financially life has been getting better, there are many less quantifiable factors which point in the opposite direction. For younger people, with less hope of getting on the property ladder and with later achievement of life’s milestones, with greater social pressures, a loss of religion and community and with increasing working hours, it would be easy to compare one’s life less favourable to that of one’s parents, despite having the latest smartphone and a Netflix subscription.
And thirdly, the unit of measurement has changed from possessions to experiences. Yesterday’s marble sideboard, or big screen TV, has now been replaced by one’s life experiences. As Ewan McGregor neatly surmises in the current Expedia ad, ‘Do you think any of us will look back on our lives and regret the things we didn’t buy? …or the places we didn’t go?’ In the context of the safety blanket of basic comfort factors created by the past century of increases in absolute societal wealth, new emphasis has been placed on unique and hard to come by (but nevertheless fleeting) ‘experiences’ to establish one’s place in the pecking order. This might appear to an older generation as profligate or poorly prioritised; however, I would argue that it is (a) little different from the accumulation of unneeded assets in a previous generation, and (b) in any event it reflects the current societal reality, which is always hard to buck as an individual.
And so, although empirical quality of life factors in UK cities have been improving over the long run, a medium-term reversal of growth, together with an acceleration of social competitiveness is eroding how these gains flow down to a younger generation. And in that context, cutting back on Netflix feels unlikely to be the answer.
How might this discussion translate to our cities and real estate in the future?
Firstly, in respect of housing, the position is clear that increasingly young people will either be priced out of (or indeed opt out of) home ownership. This applies particularly in those big cities where house price growth has been strongest in recent years. Our UK obsession with home ownership is likely to go in reverse over the next 20 years. The only viable route for many onto the housing ladder will be to avoid housing costs through living with their parents for longer. Multi-generational housing will become a bigger component of life in our cities, and those younger people reliant on it are hence likely to be less geographically mobile.
This in turn has knock-on impacts to other areas. The wealth gap between homeowners and everyone else will exacerbate existing levels of inequality, including an increased stratification by age, with older people increasingly having the purchasing power advantage over younger ones. If the average age of home ownership continues to rise, then other life milestones, including age at retirement are also likely to change. Our workforce will skew older, and our offices will be increasingly multi-generational.
Thirdly, regional variations are likely to become more pronounced. As someone who grew up in Hull, my expectations around possessions and holidays were, I suspect, lower than someone who grew up in Surrey. My aspirations were bookended by the consumptive capacity of my friends with similar backgrounds and I didn’t feel like I was missing out. However, my expectations for other factors such as the ability to buy a detached house, finish work on time, and enjoy a short commute were comparatively high due to low local land costs and typical work practices. Of course, all of this reversed when I moved to London. In contrast to the housing and other life-quality sacrifices made by urbanites, the opportunity and challenge for our big cities going forward will be to provide an exciting proposition that allows people to bank socially valuable ‘experience points’.
Fourthly, best in class now needs to look beyond your local city. In an increasingly visible and accessible global marketplace, workplaces, shops, and the cities in which we live will increasingly be compared with national or global best. Your employees and customers are increasingly getting ‘best’ served up to them every day on Instagram and LinkedIn. Understanding what this looks like and lifting the bar to match expectations will be an increasing part of product development in real estate.
And finally, the challenge for city and central government will be to create a fairer and more equal society which allows us to focus on what actually matters, rather than getting a superficial leg ahead of our neighbours. There are no silver bullets; however, a reframing of objective success around more nuanced metrics than GDP, and a recognition that equality serves all of our interests would be a solid start. Individually, we could perhaps make more effort to ignore the Joneses. As author TW Lawless commented, ‘Don't worry about trying to keep up with the Joneses. They're flat out trying to keep up with their repayments.’
Regards,
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